Mr. and Mrs. A (both over 30) respectively own 100 voting and 100 non-voting common shares of Investco which wholly-owns Opco (with a non-services business). Only Mr. A is actively engaged in Opco’s business on a regular, substantial and continuous basis.
In Year 1, Opco pays a $1M dividend to Investco which Investco invests in shares of publicly-traded corporations; then in Year 2, Investco pays a dividend-in-kind to Mrs. A of its entire portfolio which, at that time, has an aggregate FMV of $1.1M (for an accrued gain of $0.1M). Would this dividend be characterized as income that is derived directly or indirectly from a related business for s. 120.4 purposes – and would the answer change if the dividend was paid before 2018?
After quoting s. 120.4(1.1)(d), and before concluding that only $1.0M of the $1.1M dividend-in-kind received by Mrs. A would be derived from the related business of Opco in respect of Mrs. A (so that if Investco does not have a related business in respect of Mrs. A, $100,000 of the amount would not be derived from such a business), CRA stated:
The portion of the FMV of the distributed stock portfolio that represents the initial investment of the dividends paid by Opco to Investco would be considered to be derived, directly or indirectly, from the related business of Opco in respect of Mrs. A. However, gains earned by Investco as a result of the investment of those dividends would not be considered to be derived, directly or indirectly, from the related business of Opco in respect of Mrs. A.